a)You purchase a 3-year US government bond with a face value of €1,000 and semi-annual coupon payments amounting to €25. The bond will still make six coupon payments plus pay back the principal. If the semi-annual yield to maturity is currently 5%, the present value of this bond would be?
b) Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company, will pay a year-end dividend of €2 per share. If the stock is selling at €50 per share, what must be the market’s expectation of the growth rate of MBI dividends?
c)Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be
a. The price of the bond can be found using PV function in EXCEL
Here the payments are semi-annual
nper=6 (coupn payments remaining)
The price of the bond=873.11
b. As per the dividend discount model,
growth rate=expected return-(Dividend/Stock price)=16%-(2/50)=16%-4%=12%
c. The formula is same PV function
The price after one year=1066.24
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